Cutting to the heart of the rate cut

BAILOUT SEMATICS: A day after the Federal Reserve chopped its most important interest rate by half a percentage point, a newspaper headline proclaimed, ‘Experts: Rate cut not a ‘bailout.''

Really? What do we call, then, a decision that immediately sent the Dow Jones industrial average surging by more than 330 points, and had pit traders on Wall Street grinning from ear to ear?

A day after the Federal Reserve chopped its most important interest rate by half a percentage point, a newspaper headline proclaimed, 'Experts: Rate cut not a ‘bailout.'?'??

Really? What do we call, then, a decision that immediately sent the Dow Jones industrial average surging by more than 330 points, and had pit traders on Wall Street grinning from ear to ear? If it's not a bailout, it certainly is — to paraphrase former Fed chairman Alan Greenspan — a governmental nudge toward more 'irrational exuberance.'

It was several years of irrationally exuberant lending that helped get America's credit market into the predicament that precipitated the Fed's action. Mortgage companies made risky, adjustable-rate loans to millions of home buyers, sometimes not even asking for proof of income. When borrowers increasingly couldn't keep up, the pendulum began swinging the other way, with credit harder to come by.

Now, with $50 billion worth of mortgages poised to reset at a higher rate in October, and under significant pressure to maintain liquidity, the Fed cut rates for the first time since 2003. It also slashed its discount rate, the interest it charges banks to make direct loans. That's partly what the central bank is for, of course, to guide the flow of money when lenders, borrowers and investors get into trouble. This is yet another reminder that our free market isn't all that free.

The high finance guys can call it a correction, an anti-recession tool, a measure 'to forestall potential effects of tighter credit conditions on the broader economy,' as did current Fed Chairman Ben Bernanke, but the rest of us don't have to hide behind their fancy semantics.